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Capital Markets

Sovereign wealth funds: Back to basics in 2010

Caution and safety in numbers in 2009; Accelerating investment in Q2 continuing into 2010

It was a nail-biting year for sovereign wealth funds (SWFs) in 2009. With the price of oil, currency movements, and exposure to financials and real estate to worry about, many funds were in a state of paralysis in the first half of the year. Only $3.5 billion was invested between April and June as equity markets rallied, the lowest quarterly level since the last three months of 2004.

Even those funds that were active displayed more caution and sought safety in numbers on big deals. Collaboration between sovereign wealth funds in order to spread the risk of investments had not been seen before 2009.

In 2009 a lot less leverage was available even for acquisitions of distressed assets. Although some funds such as the Kuwait Investment Authority and Abu Dhabi Investment Authority do not use leverage to increase investment returns, others that do, such as the Qatar Investment Authority, have found it hard to come by.

"Some SWFs have used collars mostly to get leverage and protection in a declining market but they create the problem of losing upside," says Patrick Mole, a managing director in strategic equity transactions at Société Générale. In general, though, it has been back to the basics of long-term investing.

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